One of the most important issues in the management of supply chains for maximizing the efficiency of a production line is the right size of inventory stock. When planning the production, manufacturers try to achieve several goals: reduction of working capital, reduction of the risk of inventory write-off and improvements in service levels. Part of the inventory represents cycle stock and is due to batch production: high changeover costs push manufacturers to produce in large batches thus creating high inventory. But part of this inventory is safety stock that enables manufacturers to manage demand, supply and manufacturing variability.
Simple formulas exist to compute the minimal inventory to guarantee a given service level, or a given fill rate. These safety stock levels are then fed into a production planning system that computes the production frequency of every product. When the production chain is organised according to periodic manufacturing steps, these state of the art safety stock calculations are providing a right balance between the requirements of ensuring the right stock when needed by the production, without an excessively big inventory. In most cases however these frequencies may vary during time and be far from the initial assumptions, thus invalidating the stock targets. This scenario could then lead to maintaining the wrong amount of inventory, resulting in both higher inventory levels than necessary and stock-outs which hurt service levels. This process, where safety stock calculations is independent from production plans, leads to safety stock levels based on averaged production frequency. When production planners understand that the average production frequency may be different than the realized production frequency, they compensate for the difference by producing more stock than necessary.
An explanation of state of the art safety stock calculation can be found in vanRyzin, Garrett, “Analyzing Cost and Service in Supply Chain”, Columbia Business School, 2001, incorporated herein by reference in its entirety. In general, prior art systems which address this issue provides unsatisfactory results when the production process is characterized by possible change in frequency of manufacturing steps.